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IMPROVING COMPETITIVENESS OF THE AUSTRALIAN SUGAR INDUSTRY BY

ANALYSING CANE SUPPLY ARRANGEMENTS ACROSS THE VALUE CHAIN

Article · January 1999

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Contributed Paper 1999 AARES Conference, 20-22 January, Christchurch, New Zealand.

IMPROVING COMPETITIVENESS OF THE AUSTRALIAN SUGAR INDUSTRY BY

ANALYSING CANE SUPPLY ARRANGEMENTS ACROSS THE VALUE CHAIN

L.E. BRENNAN1, R.C. MUCHOW1,2, M.K. WEGENER1,3 and A.J. HIGGINS1,2

1
CRC for Sustainable Sugar Production
James Cook University, Townsville, Q 4811
2
CSIRO Tropical Agriculture, 306 Carmody Road, St Lucia, Q 4067
3
Department of Agriculture, University of Queensland St Lucia, Q 4072

Abstract
The term “value chain” describes the collection of activities that are performed to design,
produce, market, deliver and support a product. The Australian sugar industry value chain has a
number of distinct stages involved in the transformation of the cane crop into raw and refined
sugar and other manufactured products. These stages include production, processing and
distribution functions. Despite its linear direction, a critically important feature of the sugar
industry value chain is that it is not a collection of independent activities but a system of
interdependent activities. In the Australian sugar industry, there remains a significant degree of
segregation in the organisation of growing, milling, and marketing activities, despite the fact that
these sectors are linked. These linkages reflect the need to coordinate activities between growers,
millers and marketers, and do not appear to have been fully exploited in the way that a more
vertically integrated industry would. A key question is what opportunities exist to manipulate the
whole value chain to enhance industry profitability and competitiveness? To address this
question, this paper explores the strengths and weaknesses of value chain analysis as a
framework to review the competitive position of the Australian sugar industry and identify
opportunities for improvements. It is concluded that there is a need to examine more novel
approaches that could achieve further efficiency gains across the entire sugar industry value
chain. This will involve going beyond traditional measures of competitiveness and focussing on
improving the organisational efficiency of the industry.

Introduction
The term “value chain” describes the collection of activities that are performed to design,
produce, market, deliver and support a product (Porter, 1985). The sugar industry value chain has
a number of distinct stages involved in the transformation of the cane crop into raw sugar. The
key elements of the sugar industry value chain are:
 Sugarcane production
 Cane harvesting, infield transport and haulage to mill
 Raw sugar manufacture
 Sugar transport and storage
 Marketing and distribution to customers
The sugar industry value chain is essentially linear: cane from farms is processed at raw sugar
factories into raw sugar that is distributed to refineries and other users. Each major function in
the sugar industry is largely carried out by separate economic entities. There is a high degree of
vertical integration through the value chain although this is not of the type normally covered by
the accepted economic definition.
Despite its linear direction, a critically important feature of the sugar industry value chain is that
it is not a collection of independent activities but a system of interdependent activities. These
linkages reflect the need to coordinate activities between growers, millers and marketers, and do
not appear to have been fully exploited. In the Australian sugar industry, there remains a
significant degree of segregation in the organisation of growing, milling, and marketing
activities, despite the fact that these sectors are linked. Examples of where linkages arise include
where the same function can be performed in different ways, or when the cost of performing
direct activities is improved by greater efforts in indirect activities.
Confronted with increasing cost/price pressure and international competition, the Australian
sugar industry has traditionally strived for technical efficiency in all components of the value
chain. The economic efficiency of the industry has also improved significantly over the past
decade. Despite the industry’s success in developing technical innovations aimed at increasing
productivity or lowering cost, the gap between Australia’s performance and that in other
countries has shrunk (Fry, 1997). This suggests there is a need to examine novel options for
further efficiency gains across the entire sugar industry value chain. For example, modified cane
supply and harvest scheduling arrangements can potentially enhance whole industry profitability
and competitiveness (Muchow et al., 1998). A key question is what further opportunities exist to
manipulate the whole value chain to enhance industry profitability and competitiveness? This
paper aims to explore the issue of better integration of economic research into all these areas to
benefit whole industry profitability.

Value chain analysis

The purpose of value chain analysis (VCA) is to enable companies to analyse their competitive
position. The process is aimed at defining the various steps in the product supply chain and the
type of traders active within it so the cost of each activity can be assessed and value can be
created (Booth, 1997). The cost structures of different products and services at different stages of
the process are also identified. In short, VCA defines the different steps where a company’s
value-adding capability rises or falls. VCA defines the entire chain through which goods are
supplied to a customer. The supply of goods to a consumer requires several parties to work in
concert within a chain. In the global sugar market, this implies that the Australian sugar industry
is a value chain competing for market share with other international value chains. The supply of
goods to the consumer requires several parties in the sugar industry to work in concert within the
value chain.
VCA was originally used as an accounting analysis tool to shed light on the profitability of
separate steps in complex manufacturing processes. The term ‘value chain’ was first popularised
by Porter (1985) who said a value chain disaggregates a firm into its strategic relevant activities
in order to understand the behaviour of costs and potential sources of differentiation.

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VCA is effectively a benchmarking tool. Decisions on whether to invest in a particular industry
sector require an understanding of the organisation’s own cost, their likely rate of improvement
and how they compare to those of new entrants and existing firms. By examining the value chain
up-stream and downstream, the implications of extending or limiting the operations of any
section of the chain can be understood. Breaking up the value chain exposes the units within it to
market pressure and show where value is being created within the chain. Such an approach
exposes cross-subsidisation within the value chain.
VCA can also facilitate commercial negotiations to be conducted in a transparent manner to
stakeholders. VCA provides the possibility of negotiating around a cost model, not a price,
which is an approach that encourages the dialogue necessary to support partnerships. Partners
can jointly identify changes to trading practice and then negotiate on the share of benefits. This
could be particularly relevant to the miller-grower relationship in the sugar industry. Harvesting
and transport operations are important operations at the mill-grower interface.
There does not appear to be any published cases of VCA applied to an agricultural commodity
value chain. Organisations and industries which are suited to value chain analysis have input
variables, processing or transformation functions, and outputs which are products or services.
The sugar industry value chain has a number of distinct stages involved in the transformation of
the cane crop into raw sugar. These include production, processing and distribution functions,
which suggests that cane/sugar supply arrangements could be analysed in a VCA framework.
The Australian sugar industry is a price-taker. VCA has been described as an appropriate tool to
examine the competitiveness of price-taking firms or industries (Reddy, 1998). Theoretically,
when firms are price takers their competitive advantage lies in the cost drivers. That is, if they
can lower costs while maintaining the market price, they will be able to widen their margins and
increase profitability.
There are limits to the value chain approach. It is important to recognise, however, that the flow
of sugar from farms to the final customer, and its transformation from a cane crop to raw sugar is
not strictly a chain, and it is more appropriate to conceptualise it as a system. A system implies a
complex of factors that are interrelated and interact, while a conceptual boundary may be erected
around the complex as a limit to its organisational autonomy (Dent, 1971). The systems view of
research is a holistic one which implies that an isolated study of parts of the system will not be
adequate to understand the complete system because the separate parts are linked in an
interacting manner. A limitation of the VCA approach is that the theory and practice of VCA
does not appear to extend beyond compartmentalised analysis of the one-way flow of product
and does not analyse the linkages or interdependencies among these flows.

Competitive analysis of the value chain - putting the Australian sugar industry in
perspective.
Sugar is produced in over 100 countries. However, exports (which account for around 30%, or
36 million tonnes, of global production) are concentrated within three countries: Brazil, Thailand
and Australia. Their combined production makes up 55% of the volume of sugar traded on the
world market (Chapman and Milford, 1997). Australia exports approximately 85 per cent of its
total sugar production.

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Since 1986, global sugar production has increased by 1.8% per annum, reaching 119.1 million
tonnes by 1995. Growth in consumption until at least the year 2000 is likely to continue to be
close to 1% per annum. This has implications for Australia in that it will restrict the overall
world market for our sugar (Chapman and Milford, 1997). Since most of the growth in
consumption is expected to be in countries in Australia’s immediate region, we can look forward
to continuing demand for our sugar provided our marketing and service package is acceptable to
customers (Chapman and Milford, 1997).

Prices
The direct exposure of the Australian industry to the world sugar price drives the industry’s
competitive position. Even though Australia is one of the world’s largest exporters, it still has
little control over world prices. It should be noted, however, that when the market is segmented
into regions and subperiods of the year, Australia’s influence on the market increases
significantly. Australia exports less than 4 per cent of global production, but in the second half of
the year it supplies more than 80 per cent of the sugar traded in the Asian region (Warren Males,
pers. com., 1998). In most countries, the domestic market absorbs most of the production at a
significant premium when compared to the world market price. Australia’s domestic market is
the smallest of any of the major exporters.
Many sugar industries enjoy high levels of protection, with the majority of domestic markets
protected by import tariffs, while domestic prices are often set at levels well below the price of
internationally traded sugar. As a result of this protection, over production is encouraged which
places downward pressure of global sugar prices (BCG, 1996). There is broad agreement that
global sugar prices are volatile and have been depressed as a result of these policies (BCG,
1996). In contrast, Australian producers have received no protection since the removal of the
$55/tonne import tariff on 1 July, 1997. Despite the volatility of world sugar prices, Australia has
expanded production. Expansion will only occur if price expectations are reasonable (Chapman
and Milford, 1997). Cane production appears to be relatively inelastic to downward movements
in sugar prices because the sugar industry is generally not short term in its planning horizons.

Benchmarking Australia’s competitive position

Fry (1997, 1998) has performed benchmarking studies of the competitiveness of international
sugar industries, in terms of both technical and cost efficiency of the components of the value
chain.

Technical competitiveness:
Australia’s high yields in the field and good factory recoveries are targets for other producers,
although the gap between Australia’s performance and that in other countries has shrunk. In
terms of the sucrose per hectare per year, Australia’s yields are significantly higher than our
major export competitors, Brazil and Thailand. Only four countries achieve overall factory sugar
recoveries of over 85% and only Swaziland and Australia come close to breaching the 90%
mark. Again, Thailand and Brazil perform poorly relative to Australia. Overall, the scope for
yield improvements in the field is much greater than that for higher recoveries in the factory,
with Australian mills coming close to the realistic economic limits on recoveries.

4.
Cost competitiveness:
Economic and technical efficiency are not necessarily synonymous. While it is important to
consider technical efficiency, on the global sugar market, the reality is that low cost producers
have the best prospects for survival. Fry (1997) asserted that low cost producers in Australia,
Thailand, Brazil, India and southern Africa will therefore continue to grow in importance, while
the role of high cost producers in Europe, the US, the Caribbean and Eastern Asia will diminish.
When field and factory costs are combined, Thailand and Australia are the most cost-competitive
industries. Australia’s special advantage is its low cost for getting sugar into export vessels.
Fry (1998) noted that the decline of the Hawaiian cane industry, which had long achieved the
highest levels of productivity (in terms of yields of sugar per hectare) and the ability to process
cane throughout the year, demonstrates that technical excellence counts for very little if
production costs are too high. On the other hand, the Thai sugar industry has grown into one of
the main exporters in the world, despite low yields, poor cane quality, and mediocre factory
recoveries. Low technology/low input/low output industries can be economically competitive.
The Thai industry shows that technical efficiency to one industry is not necessarily efficiency to
another. Both industries can be efficient yet have entirely different positions on the production
possibility frontier. The structure of the production process is driven by the relative prices of the
different factors of production and the productivity of each. For example, Australia has relatively
inexpensive capital and expensive labour hence the Australian industry is relatively capital
intensive in its production processes. It makes little sense for the Thais to adopt the same process
because their labour is inexpensive relative to capital (Warren Males, pers. com., 1998).

Limitations of the benchmarking approach

The purpose of benchmarking is to enable operational improvements by identifying, adopting,
and deploying the best practices of world-class organisations. However, in the context of
improving Australia’s competitive position, there are a number of limitations in the
benchmarking approach. Organisations use benchmarking information about better practices to
implement a change in their own practices. The comparison of the Australian sugar industry’s
performance to those of direct competitors is obviously less useful for a leading industry such as
Australia’s.
The benchmarking studies of Fry (1997, 1998) have focussed only on the cost and technical
efficiency of individual components of the value chain. The future for maintaining Australia’s
competitive position lies beyond analysing the traditional measures of competitiveness, and there
appears to be a need to explore the organisational efficiency of the Australian industry, in areas
such as harvest season length and cane supply arrangements. Research into the Australian sugar
industry value chain needs to focus more on prescriptive as opposed to descriptive analysis.
The other limiting feature of previous competitor analyses of the international sugar industry is
their essentially static nature. Dynamic analyses which consider the possibilities of change and
uncertainty in an economic relationship on a year to year basis (eg climate-driven production
variability, sugar price variability, exchange rate variability) would be more appropriate.
Previous studies have not accounted for the heterogeneity of the individual units that make up
various components of the value chain. Australian sugarcane farms and mills are characterised

5.
by a large range of physical and financial circumstances which must be recognised, especially
for any dynamic analysis of the Australian sugar industry value chain. Various firms in the
Australian sugar industry respond differently to changed circumstances, such as price and
production variability, depending on factors such as the maturity of the various district sugar
industries ie whether districts are in an expansionary or contraction phase.
Chapman et al. (1997) employed a different approach to considering the competitiveness of the
Australian industry. They examined the transaction costs associated with the administered
relationship between sugarcane growers and millers in the Queensland sugar industry under
current arrangements as well as the economic ramifications of deregulation of this contractual
arrangement. Transaction costs are those associated with planning and negotiating when two or
more parties do business, the costs of changing plans, renegotiating terms, and resolving
disputes, and the costs of ensuring that parties perform as agreed. An element of transaction cost
economics is establishing the relative efficiencies of different organisational forms. The authors
examined transaction costs in the context of deregulation of the Queensland sugar industry, but
opportunities to examine transaction costs in other contexts could also be considered.

Improving competitiveness by exploiting linkages across the value chain

Exploiting the linkages and interdependencies within the sugar industry value chain, which are
often subtle and go unrecognised, will become critical to maintaining the competitive advantage
of the Australian sugar industry. Linkages imply that a firm’s (or industry’s) cost or level of
differentiation is not merely the result of efforts to reduce cost or improve performance of each
value-adding activity individually. Therefore, cognisance needs to be made of the linkages to
improve value chain management to increase profitability.
Exploiting linkages often requires optimisation that cuts across conventional organisational lines.
Higher costs in the production or harvesting of cane could result in better quality sugar or lower
marketing costs but such trade-offs may not be measured in any one sector’s information and
control systems. Managing linkages is thus a more complex organisational task than managing
value-adding activities themselves. Given the difficulty of recognising, developing and managing
linkages, the ability to do so often leads to a sustainable source of competitive advantage,
particularly over Brazil and Thailand. While not the case for Thailand, the level of vertical
integration in Brazil’s sugar industry, means that it could also make significant gains from better
management of its linkages in the value chain (Milford, pers. com., 1998). It is therefore
important that the Australian industry moves rapidly to manage and exploit value chain linkages.
Exploiting linkages to achieve competitive advantage usually requires information or
information flows that allow optimisation or coordination to take place. Thus, information flows
are often vital for gaining competitive advantage from linkages. Recent developments in
information systems technology are creating new linkages and increasing the ability to analyse
and exploit old ones. Data quality and accessibility is therefore critically important for assessing
opportunities to improve the efficiency of the value chain.
The research challenge is to identify opportunities to exploit linkages to improve the competitive
position of the sugar industry. The prospect of a changed regulatory environment also provides
the impetus for this research. The regulation of industries such as sugar is designed to ensure that
all units operate under similar rules and therefore limits competition. There has been a definite

6.
attempt in the sugar industry in recent years to reduce the level of government intervention and
to open up the industry to more competition. The consideration of competitive advantage
becomes more relevant under such circumstances.
Obvious linkages to target are those where trade-offs are involved or coordination of activities
across the value chain can be improved. There is a need for considerable economic analysis into
the consequences of doing things in the sugar industry in different ways. Such research needs to
value-add, and examine scenarios that exploit interdependencies across all sectors of the
industry, using a dynamic framework. Possible scenarios for evaluation include: (i) changing the
production season for sugar particularly early season production; (ii) changing cane pricing
arrangement; (iii) modifying crush start and finish times; (iv) changing harvesting rates, crushing
capacity and storage capacity and (v) impacts of price variability including exchange rate
movement.

Methodological challenges
The VCA / benchmarking approach provides useful insight into the competitive position of the
Australian sugar industry, but, given the limitations of this approach described above, a more
appropriate methodology to assess the consequences of manipulating links in the sugar industry
value chain needs to be identified.
Mathematical programming is one such approach that can be used to optimise profits across the
whole sugar industry value chain. To date, there have been no serious attempts at using
mathematical techniques to optimise across several value chain components for the Australian
sugar industry. Mathematical techniques have been applied, however, to optimise cane supply
from the point of cutting in the field to delivery at the mill gate. This allowed the exploitation of
yield and CCS variation during the harvest season, and the specification of constraints associated
with harvesting, transport and crushing capacity, to evaluate options for improved profitability
(Higgins et al., 1998; Higgins and Muchow, 1998).
There are a number of limitations associated with the application of mathematical programming
models to optimising the whole industry value chain. Computing power is limited even with
today's computers. A model that addresses a full industry value chain can require an enormous
number of meaningful decision variables that cannot be adequately represented.
To optimise the whole sugar industry value chain, we have to take a much broader approach than
just optimising the cane supply. It is not simply sufficient to build a whole industry model from
the individual activities in the cane supply optimisation model. The problem requires aggregation
and redefinition of activities and some consequent loss of detail to be able to present a realistic
and useful model of the whole industry value chain.
Since the cane supply options optimisation model itself is not broad enough for full value chain
analysis, it could be taken as one module with information links to other modules. A cane
transport scheduling model could be another module, while sugar price, exchange rate and
climate forecasting models may be others. That is, some modules would be optimisation models
if most suitable for the task while other modules would be socioeconomic, environmental and
forecasting models.

7.
One analogy is a sophisticated airline scheduling system developed by SABRE Decision
Technologies which links passenger demand forecasting models with aircraft assignment and
routing models (Cook, 1998). This airline system has increased total revenue by several
hundreds of millions on dollars for United, Delta, Lufthansa, Swissair, and Air France.
The information links would allow the interdependencies between value chain components to be
correctly assessed and modelled. Through these links, modification to any part of the sugar
industry value chain (e.g. crush start time) would automatically update all value chain modules to
give the full industry analysis. The key research areas over the coming years will be to identify
and model the module information links as well as to construct the modules. As discussed above,
some of the individual modules are already available. Developing the modules and links would
be a multidisciplinary research and industry effort involving economists, operations research
scientists, agronomists, crop-soil modellers, climate forecast scientists and industry partners.

The path forward

Not only is the Australian sugar industry characterised by climate-driven production variability,
Australia is a price taker and therefore exposed to the volatility of world sugar prices. Against
this dynamic background is a need to exploit linkages and interdependencies across the
components of the industry value chain to enhance the competitive position of the industry. This
will involve going beyond traditional measures of competitiveness and focussing on improving
the organisational efficiency of the industry. The path forward is to identify an alternative
methodology, which goes beyond benchmarking to approaches which optimise the benefits from
exploiting value chain linkages. This needs to be closely linked with industry’s desire to evaluate
alternative ways of doing business.

References
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Production: Meeting the Challenges Beyond 2000. CAB International, Wallingford, UK,
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Chapman, R.N., Milford, B.J. and Burrows, G.H. (1997). Transaction costs in the sugar industry
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